While financial markets in Western countries have gradually developed over hundreds of years, capital markets in emerging markets have been hastily introduced as a result of dramatic changes in economic and political systems. Mass privatization programs have transformed hundreds of thousands of state-owned companies into joint stock companies. Voucher privatization by itself has created millions of new but poorly informed retail shareholders. Along with the privatization reform, the first generation of company laws in the 1990s introduced new corporate governance instruments and concepts to post-communist countries. Their implementation, however, did not generate the expected results of fair distribution of state-owned assets, economic prosperity, the protection of investors and shareholder democracy (Megginson and Netter, 2001). As noted by Black et al. (2000), “writing good laws can take years and building good institutions takes decades, but the privatizers weren’t willing to wait.”
1.1 Complicating Factors
A lack of institution building, education and implementation may have been a cause for the failure of privatization programs. This also may have been a complicating factor for the introduction of modern corporate governance practices. In the absence of supporting institutions, the challenges of reformers are enormous. Although securities and exchange commissions (SECs) should play an important role in the education and enforcement of market participants, their establishment has not always been a first priority in new markets. Once established, SECs are often not adequately funded and staffed to enforce securities legislation and regulations.
Existing court systems historically have not been designed to adjudicate complex commercial cases that involve the protection of shareholders and creditors. Specialized commercial courts are not common. Judges are inadequately educated and informed about new corporate governance systems, and frequently rotated, overloaded and underpaid. Financially sustainable institutes of directors that focus on the education and self-regulation of their members are rare.
Business services industries that provide continuing board education are not feasible due to a lack of interest and support from business communities. In a similar vein, organized shareholder activism through NGOs is generally poorly developed and underfunded. Journalists are not informed and large scale educational TV and radio programs on shareholders’ rights to reach out to shareholders through the media are rarely sponsored by governments and their ministries.
Faced with these problems, lawmakers and regulators must attempt to implement modern corporate governance standards and develop a professional class of independent directors. This is not an easy task. It takes dedication, highly specialized expertise, substantial financial resources, and a long term vision to change a country’s business culture and shareholder protection systems.
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